Court File and Parties

COURT FILE NO.: 34/16 (Peterborough) DATE: 20160415 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Gauvreau & Associates Professional Corporation, Plaintiff - and - Pelton & Co. Professional Corporation, and Laurie Pelton, Defendants

BEFORE: Bale J.

COUNSEL: Jeffrey Ayotte, for the Plaintiff Steven Baldwin, for the Defendants

HEARD: April 1, 2016

Endorsement

1On this motion, the plaintiff requests an interlocutory injunction prohibiting the defendants from:

• carrying on business as accountants or bookkeepers in Ontario;
• soliciting the plaintiff’s clients, including those clients whose names appear on the client list sold by the defendants to the plaintiff; and
• accepting business from the plaintiff’s clients, including those clients whose names appear on the client list sold by the defendants to the plaintiff

2Robert Gauvreau and Laurie Pelton are chartered professional accountants. Mr. Gauvreau is the principal of Gauvreau & Associates; Mr. Pelton is the principal of Pelton & Co. The latter entities are professional corporations. At the time in question, both firms were based in Peterborough, Ontario.

3In February 2015, Gauvreau & Associates entered into an agreement with Pelton & Co. to purchase the follow assets:

• the goodwill, client list (“Pelton client list”), and telephone number, of Mr. Pelton’s accounting and bookkeeping practice, as carried on through Pelton & Co.; and
• the computers, telephone system, and filing system of Pelton & Co.

4The purchase price to be paid by Gauvreau & Associates to Pelton & Co. was $9,950, plus 20 per cent of the gross amount billed by Gauvreau to the clients on the Pelton client list, from the date of closing to December 31, 2019. The latter amounts were to be paid to Pelton on the thirty-first day of January in each year, commencing January 31, 2016.

5A number of schedules were attached to the sale agreement, and deemed to form part of the agreement. These schedules included an independent contractor agreement, and a non-competition agreement.

6The independent contractor agreement provided that Pelton & Co. would, as an independent contractor of Gauvreau & Associates, provide,

• bookkeeping and accounting services to “those individuals and entities who were clients of Pelton & Co. at the close of business on February 15, 2015”; and
• such other services to Gauvreau’s clients, as directed from time to time.

7The term of the independent contractor agreement was from February 16, 2015 to June 30, 2016, but the agreement would automatically renew, unless one of the parties gave notice to the other that it did not intend to renew.

8For providing the services, Pelton & Co. was entitled to a base management fee of $2,083.33 per month, plus 26 per cent of the amounts billed and collected for those services. These amounts would be paid to Pelton by way of a monthly draw of $8,000, with a reconciliation on July 31, 2015, and on the thirty-first day of July in any renewal term.

9The non-competition agreement provided that neither Laurie Pelton nor Pelton & Co. would, at any time within a period of seven years from the date of the agreement, carry on, or be engaged in, within the Province of Ontario, the business then carried on, or similar to the business then carried on, by Gauvreau & Associates.

10Following closing, Laurie Pelton provided accounting services in accordance with the independent contractor agreement. However, in December 2015, he left Gauvreau & Associates, and became an associate in an accounting firm in Whitby, Ontario, established by John O’Keefe, a former Gauvreau employee.

11Gauvreau & Associates then commenced an action to enforce the non-competition agreement, and brings this motion for an interlocutory injunction prohibiting Laurie Pelton, and Pelton & Co., from breaching the agreement.

12As of the date the motion was argued, approximately one-half of the clients whose names appear on the Pelton client list had retained Laurie Pelton, at his new firm.

Positions of the parties

13The plaintiff argues that the agreement between the parties is a contract for the sale of a business, and that therefore the included non-competition agreement should be enforced, being reasonable as to its term, and the territory and activities to which it applies. In the alternative, the plaintiff argues that if the non-competition agreement is unenforceable, either because the agreement between the parties is determined to be an employment contract, or otherwise, then the provisions of the non-competition agreement should be read down, as may be required to meet the test of reasonableness.

14The defendants oppose the motion on three grounds, each of which they argue is sufficient to defeat the motion, independently of the other two.

15First, they argue that the non-competition agreement is unreasonable because it purports to prevent Mr. Pelton from earning a living. Second, they say that pursuant to the provisions of the underlying agreement, the plaintiff assumed the employment relationship between Laurie Pelton and Pelton & Co., and that the plaintiff is therefore not entitled to rely upon the non-competition agreement. Third, they argue that the plaintiff has breached the underlying agreement, and is therefore not entitled to rely upon the non-competition agreement.

Analysis

Test on motion for interlocutory injunction

16The factors to be considered on a motion for an interlocutory injunction are the strength of the plaintiff’s case, irreparable harm, and balance of convenience. The extent to which irreparable harm, and balance of convenience, are considered will depend upon the strength of the plaintiff’s case: Van Wagner Communications Co., Canada v. Penex Metropolis Ltd., 2008 ONSC 1427, at para. 39.

Whether the agreement between the parties was a contract for the sale of a business, or an employment contract

17The question of whether a non-competition agreement is reasonable will depend, in part, on whether the agreement is part of a contract for the sale of a business, or alternatively, part of an employment contract. Stricter non-competition provisions are permitted in contracts for the sale of a business, than in employment contracts; and in an employment contract, the only acceptable restrictive covenant may be non-solicitation, as opposed to non-competition.

18In contracts for the sale of a business which include goodwill, the purchaser has a legitimate interest in protecting the goodwill from competition from the vendor. If parties were not free to include non-competition clauses in such agreements, business owners wishing to retire, or to move on to other things, would have difficulty selling their businesses.

19Such considerations do not generally arise in the context of employment contracts. Non-competition agreements are struck down in employment cases, because of inequality of bargaining power, and because both the departing employee and the public have an interest in the ability of the employee to employ his or her skills to earn a living.

20In support of his position that the agreement is a contract for the sale of a business, rather than an employment contract, plaintiff’s counsel points out that the agreement is entitled “Asset Purchase and Sale Agreement”, and that in fact, his client purchased assets from the defendants, including the Pelton client list. He argues that there was no inequality in bargaining power in the formation of the agreement – both sides were represented by competent solicitors, and at least ten drafts of the agreement were passed back and forth, before the final agreement was signed. Although Mr. Pelton worked for Gauvreau through an independent contractor agreement between Pelton & Co. and Gauvreau & Associates, the independent contractor agreement was only for an initial term of 16 months, after which either party could terminate it. And finally, the independent contractor agreement included an acknowledgment by the parties that the agreement did not create a partnership or employment relationship.

21From Mr. Pelton’s point of view, the purpose of the agreement was to allow him to concentrate on client service, without being responsible for operating a business. At 66 years of age, this was important to him. He says that a number of promises were made to him by Mr. Gauvreau, including the following:

• that he would be given year-end work for Gauvreau clients;
• that he could continue working at Gauvreau & Associates for as long as he liked, provided that he worked full time;
• that adequate staff and other services would be provided to him; and
• that the work done by Gauvreau & Associates employees for Pelton & Co. clients would be up to the standard of the work done for them by Pelton & Co. in the past.

22I agree with the plaintiff that the agreement between the parties is primarily a contract for the sale of a business. This is not a case of an employee being hired, with a concern on the part of the employer that the employee may leave at some point, taking clients to whom he or she was introduced by the employer. None-the-less, Mr. Pelton’s legitimate employment interests are also entitled to consideration, and therefore a flexible approach must be taken.

Whether plaintiff disentitled to rely upon non-competition clause as a result of breaches

23Contrary to the assurances which he says were given to him by Mr. Gauvreau, Mr. Pelton says that Gauvreau had no interest in keeping him; failed to make payroll on three occasions; failed to provide him with staff, with the result that his productivity suffered; former Pelton & Co. clients were not provided with good service by Gauvreau, and were unhappy; and that on December 15, 2015, Mr. Gauvreau advised him that there would be no more work for him to do.

24The plaintiff argues that because there is an “entire agreement” clause in the asset sale agreement, the conduct complained of by the defendants, even if it did occur, does not amount to a breach of the agreement; and that the plaintiff only terminated the business relationship, after receiving evidence suggesting that Mr. Pelton intended to leave and set up a competing business.

25Based upon the limited evidence before the court on this motion, I am unable to find that there was a repudiatory breach of contract that would disentitle the plaintiff to rely upon the non-competition agreement.

Whether the terms of the non-competition agreement are reasonable

26Taking a flexible approach, and considering both the asset sale and employment aspects of the agreement, I am of the view, for the purposes of this motion, that the terms of the non-competition agreement are unduly restrictive.

27The purpose of a non-competition agreement, in a contract for the sale of assets, is to protect the legitimate interests of the purchaser in the property purchased, and not to eliminate competition. While a non-competition agreement is a valid method of protecting those interests, the restriction on competition must be no more than what is reasonably necessary to protect those interests. In this case, the duration should be no longer than necessary for Gauvreau to establish an effective relationship with the clients on the Pelton client list, and the restricted practice area should not extend beyond the territory in which the business operates. Taking into consideration the nature of the accounting practices in issue, it is, in my view, unlikely that the plaintiff will be able to successfully argue at trial, that an Ontario-wide, seven-year non-competition agreement should be enforced.

“Reading down” or notional severance

28Notional severance involves reading down an illegal provision in a contract, in order to make it legal and enforceable. In Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 S.C.R. 2007, the Supreme Court of Canada held that the concept of notional severance has no place in the construction of restrictive covenants in employment contracts. However, the case appears to leave open the question of whether notional severance may be employed in contracts for the sale of a business.

29In the present case, the plaintiff argues that the non-competition agreement may be read down to what the court finds to be more reasonable in terms of duration, and geographic practice restriction. The defendant opposes severance on the ground that severance would be re-writing the contract between the parties, which the court ought not to do.

30What concerns me about Mr. Pelton’s conduct is that after selling the goodwill of his practice to Gauvreau, he is now taking back what he sold. A reading-down of the non-competition agreement, to provide a limited protection which would prevent the defendants from soliciting the clients on the Pelton client list who are yet to jump the Gauvreau ship, would arguably be keeping the parties to their bargain, rather than re-writing it, as submitted by the defendants. Even in the absence of a restrictive covenant, one would think that the vendor of the goodwill of a business should not be allowed, at least in the short term, to take active steps to take back that which was sold. If so, then a finding that a restrictive covenant contained in the business sale contract is unenforceable should not deprive the purchaser of a reasonable opportunity to establish an effective relationship with the clients who are the subject of the sale, and it should make no difference whether the consideration for the purchase is payable in one lump sum, or over time, as in this case.

31In the result, I am of the opinion that the plaintiff meets the low threshold of a serious issue to be tried, being whether the non-competition agreement can be read down to the minimal level suggested, or even whether a vendor of goodwill should be restrained, for some period of time, from soliciting the clients on the client list sold, even in the absence of a restrictive covenant.

32The loss of the goodwill of a business is generally considered to be irreparable harm. In this case, the harm which may be suffered, between now and trial, is a loss of goodwill, and I have no basis upon which to determine that either party’s loss would be greater than that the other. Accordingly, this is a case where the balance of convenience favours maintaining the current status quo.

Disposition

33For these reasons, there will be an order prohibiting the defendants, until trial, from any further soliciting of the clients on the Pelton client list. The order will not apply to other Gauvreau clients, and will not prohibit the defendants from accepting business from the clients on the Pelton client list who have not yet retained them. Nor will it affect those clients on the list who have already retained the defendants, whether as a result of solicitation or not. For whatever reasons, they have chosen Pelton, and that choice must be respected.

34Each of the parties will be required to keep records sufficient to allow a determination at trial of the value of the business done with the clients on the Pelton client list. If the parties are unable to agree on the form of the records, or any other terms of the order, they may make arrangements to speak with me through the trial coordinator.

35Considering the (limited) success of the plaintiff on this motion, and the fact that the same issues will be argued at trial, I would think (in the absence of submissions) that the costs of the motion should be reserved to the trial judge. However, if either party disagrees and would like to argue costs, I will consider brief written argument, provided that it is delivered to my attention at Superior Court Judges’ Reception, Durham Region Courthouse, no later than May 16, 2016.